PUBLIC INTERNATIONAL LAW CASE DIGEST

9. DEUTSCHE BANK vs. CIR

G.R. No. 188550, 28 August 2013

Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue

Ponente: Sereno, CJ.

FACTS:

Pursuant to the National Internal Revenue Code of 1997, on October 21, 2003, the
petitioner remitted to the respondent the amount of Php 67,688,553.51, representing
fifteen (15) percent of the branch profit remittance tax (BPRT) on its regular banking unit
(RBU) net income remitted to the Deutsche Bank of Germany (DB Germany) for 2002 and
prior taxable years.

Believing that they made an overpayment of the BPRT, on October 4, 2005, the petitioner
filed with the BIR Large Taxpayers Assessment and Investigation Division an administrative
claim for refund or a tax credit certificate representing the alleged excess BPRT paid
(amount of Php 22,562,851.17). The petitioners also requested from the International Tax
Affairs Division (ITAD) for a confirmation of its entitlement to a preferential tax rate of 10%
under the RP-Germany Tax Treaty.

Because of the alleged inaction of the BIR on the administrative claim, on October 18, 2005,
the petitioner filed a petition for review with the Court of Tax Appeals (CTA), reiterating its
claim for refund or tax credit certificate representing the alleged excess BPRT paid. The
claim was denied on the ground that application for tax treaty relief was not filed with ITAD
prior to the payment of BPRT, thereby violating the fifteen-day period mandated under
Section III, paragraph 2 of the Revenue Memorandum Order No. 1-2000. Also, the CTA
Second Division relied on an en banc decision of the CTA that before the benefits of a tax
treaty may be extended to a foreign corporation, the latter should first invoke the provisions
of the tax treaty and prove that they indeed apply to the corporation (Mirant Operations
Corporation v Commissioner of Internal Revenue).

Hence this petition.

ISSUE:

Whether or not the failure to strictly comply with the provisions of RMO No. 1-2000 will
deprive persons or corporations the benefit of a tax treaty.

RULING:

No. The constitution provides for the adherence to the general principles of international law
as part of the law of the land (Article II, Section 2). Every treaty is binding upon the parties,
and obligations must be performed (Article 26, Vienna Convention on the Law on Treaties).
There is nothing in RMO 1-2000 indicating a deprivation of entitlement to a tax treaty for
failure to comply with the fifteen-day period. The denial of availment of tax relief for the
failure to apply within the prescribed period (under the administrative issuance) would
impair the value of the tax treaty. Also, the obligation to comply with the tax treaty must
take precedence over the objective of RMO 1-2000 because the non-compliance with tax
treaties would have negative implications on international affairs and would discourage
foreign investments.

DISPOSITIVE:

The petition was granted, the CTA en banc decision was set aside and reversed. The
respondent was ordered to refund or issue a tax credit certificate (the amount of Php
22,562,851.17) in favor of the petitioner.

PRINCIPLES:

TAXATION; NATIONAL INTERNAL REVENUE CODE; FOREIGN CORPORATIONS; Under

Section 28(A)(5) of the National Internal Revenue Code (NIRC), any profit remitted to its
head office shall be subject to a tax of 15% based on the total profits applied for or
earmarked for remittance without any deduction of the tax component.―Under Section
28(A)(5) of the NIRC, any profit remitted to its head office shall be subject to a tax of 15%
based on the total profits applied for or earmarked for remittance without any deduction of
the tax component. However, petitioner invokes paragraph 6, Article 10 of the RP-Germany
Tax Treaty, which provides that where a resident of the Federal Republic of Germany has a
branch in the Republic of the Philippines, this branch may be subjected to the branch profits

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 PUBLIC INTERNATIONAL LAW CASE DIGEST
9. DEUTSCHE BANK vs. CIR
G.R. No. 188550, 28 August 2013

remittance tax withheld at source in accordance with Philippine law but shall not exceed
10% of the gross amount of the profits remitted by that branch to the head office.

INTERNATIONAL LAW; TREATIES; PACTA SUNT SERVANDA; The time-honored international

principle of pacta sunt servanda demands the performance in good faith of treaty
obligations on the part of the states that enter into the agreement.―Our Constitution
provides for adherence to the general principles of international law as part of the law of the
land. The time-honored international principle of pacta sunt servanda demands the
performance in good faith of treaty obligations on the part of the states that enter into the
agreement. Every treaty in force is binding upon the parties, and obligations under the
treaty must be performed by them in good faith. More importantly, treaties have the force
and effect of law in this jurisdiction.

INTERNATIONAL LAW; TREATIES; TAXATION; Tax treaties are entered into to minimize, if
not eliminate the harshness of international juridical double taxation, which is why they are
also known as double tax treaty or double tax agreements.―Tax treaties are entered into
“to reconcile the national fiscal legislations of the contracting parties and, in turn, help the
taxpayer avoid simultaneous taxations in two different jurisdictions.” CIR v. S.C. Johnson
and Son, Inc., 309 SCRA 37 (1999), further clarifies that “tax conventions are drafted with
a view towards the elimination of international juridical double taxation, which is defined as
the imposition of comparable taxes in two or more states on the same taxpayer in respect
of the same subject matter and for identical periods. The apparent rationale for doing away
with double taxation is to encourage the free flow of goods and services and the movement
of capital, technology and persons between countries, conditions deemed vital in creating
robust and dynamic economies. Foreign investments will only thrive in a fairly predictable
and reasonable international investment climate and the protection against double taxation
is crucial in creating such a climate.” Simply put, tax treaties are entered into to minimize, if
not eliminate the harshness of international juridical double taxation, which is why they are
also known as double tax treaty or double tax agreements.

INTERNATIONAL LAW; TREATIES; TAXATION; A state that has contracted valid international
obligations is bound to make in its legislations those modifications that may be necessary to
ensure the fulfillment of the obligations undertaken.―“A state that has contracted valid
international obligations is bound to make in its legislations those modifications that may be
necessary to ensure the fulfillment of the obligations undertaken.” Thus, laws and issuances
must ensure that the reliefs granted under tax treaties are accorded to the parties entitled
thereto. The BIR must not impose additional requirements that would negate the availment
of the reliefs provided for under international agreements. More so, when the RP-Germany
Tax Treaty does not provide for any pre-requisite for the availment of the benefits under
said agreement.

INTERNATIONAL LAW; TREATIES; TAXATION; Bearing in mind the rationale of tax treaties,
the period of application for the availment of tax treaty relief as required by RMO No. 1-
2000 should not operate to divest entitlement to the relief as it would constitute a violation
of the duty required by good faith in complying with a tax treaty.―Bearing in mind the
rationale of tax treaties, the period of application for the availment of tax treaty relief as
required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it
would constitute a violation of the duty required by good faith in complying with a tax
treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within
the prescribed period under the administrative issuance would impair the value of the tax
treaty. At most, the application for a tax treaty relief from the BIR should merely operate to
confirm the entitlement of the taxpayer to the relief.

INTERNATIONAL LAW; TAX REFUNDS; National Internal Revenue Code; Section 229 of the
National Internal Revenue Code (NIRC) provides the taxpayer a remedy for tax recovery
when there has been an erroneous payment of tax.―Section 229 of the NIRC provides the
taxpayer a remedy for tax recovery when there has been an erroneous payment of tax. The
outright denial of petitioner’s claim for a refund, on the sole ground of failure to apply for a
tax treaty relief prior to the payment of the BPRT, would defeat the purpose of Section 229.
Duetsche Bank AG Manila Branch vs. Commissioner of Internal Revenue, 704 SCRA 216,
G.R. No. 188550 August 28, 2013

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